Worst economic performance in 16 years fires recession fear

Aug 23 2008 by Aled Blake, Western Mail

FEARS of a recession grew yesterday as miserable official data showed the economy stopped growing in the second quarter of this year.

The flat second-quarter performance is the worst for 16 years and worse than the modest 0.2% growth initially estimated by the Office for National Statistics (ONS).

It ends a run of 63 consecutive quarters of growth since April-June 1992, when the UK’s gross domestic product shrank.

The gloomy figures will increase fears of recession – defined as two consecutive quarters of negative growth – and shatter Government boasts of continuous economic growth since it came to power in 1997.

Bank of England Governor Mervyn King last week said there was “bound to be a quarter or two” of negative growth as rate-setters battle the twin threats of an economic slowdown and rampant inflation.

The ONS figures also showed the impact of the squeeze on households coping with soaring energy and food bills in the second quarter of 2008, after household spending declined by 0.1% – the weakest performance in three years.

The ONS lowered its previous estimate after revising manufacturing and construction output downwards. Growth in the powerhouse services sector – accounting for around three-quarters of economic output – was scaled back from 0.4% to just 0.2%.

The figures heighten the chances of interest rate cuts from the Bank’s Monetary Policy Committee, which has been so far reluctant to ease policy with the cost of living soaring towards 5% – almost double official targets.

But experts – who had predicted revised growth of 0.1% in the second quarter – also warned of the “very strong chance” of the UK slipping into recession.

Capital Economics’ Jonathan Loynes said: “The second estimate clearly increases the – already strong – chances that the economy will fall into recession over the coming quarters. Things will be considerably worse in 2009.”

Mr Loynes, whose downbeat view of UK prospects is being increasingly borne out by official figures, said the economy now looks set to grow by just 1.2% or so this year, with a “very strong chance” of a technical recession in the second half.

He said interest rates might have to fall as low as 3.5% from the current 5%.

A Treasury spokesman said: “The UK, like other economies, is seeing the consequences of globally high commodity prices, as well as the uncertainty in the credit markets.

“The Government’s priority is to guide Britain through these challenging times, while also supporting those hit hardest as a result of these global factors.”

Growth has been on a steadily downward course since the credit crunch struck a year ago – hammering the housing market with scarcer and dearer mortgages, and hitting the confidence of UK homeowners used to booming prices.

At the same time the shock of soaring oil and food prices has hit households and businesses alike – putting a further squeeze on consumers who have less money to put into the economy.

This inflation crisis – double the Bank’s official target at 4.4% and widely predicted to run higher – has hampered the ability of the Bank to offer relief through rate cuts.

Two more energy firms added to the pressure with price hikes of nearly 30% on Thursday – but the Bank is determined to keep the inflation genie in the bottle to avoid a return to the 1970s.

Policymakers were aiming for a gradual slowdown in the UK economy with five rate hikes in run-up to July 2007 – but the dual pressures faced by the UK have led to a harder landing than expected. Chancellor Alistair Darling’s growth predictions of between 1.75% and 2.25% this year are now also looking increasingly remote.

Projections from the Bank in its latest inflation report shows output broadly flat during the next year, but City economists have warned that with inflation set to remain above target for some time – well into next year – it is unlikely that interest rates would come down in the near future.

Mr King did not rule out the possibility that the UK could enter a period of recession, as defined by two successive quarters of negative growth.

Following these worse than expected growth figures, the Bank has fractionally more room for manoeuvre on monetary policy.

If interest rates are held at the current level for too long, the Bank will undershoot its 2% target and instead be faced with an deflation headache as prices tumble in recession.

Richard Snook, economist with the Centre for Economics and Business Research, said: “The news increases the likelihood that the Bank will move to cut rates before the new year.”

The slowdown reflected in growth figures is also however being shown in other economic indicators such as employment and business investment.

During the three months to June unemployment jumped by 60,000 and the number of people claiming Jobseeker’s Allowance increased at the highest monthly rate for more than 15 years.

Thousands of jobs have been cut in the housebuilding sector alone since the beginning of the year.

The jobless total of 1.67 million was the worst for over a year, giving a new unemployment rate of 5.4%, up by 0.2% on the previous quarter. Meanwhile the claimant count increased by 20,100 in July to 864,700, the sixth-monthly rise in a row and the highest since May 2007.

Official figures yesterday also showed business investment fell by nearly £700m in the second quarter of 2008, 1.9% lower than the first three months of the year.

Construction – impacted by slowing housing and commercial property markets – and manufacturing sectors were worst hit as businesses rein spending ahead of a recession now looking distinctly probable rather than possible.